It's surprising that markets are still so obviously irrational.
The short sellers are paying (a lot of) interest on their positions and they need those shares. The higher the price goes, the higher the interest rates get.
People long $GME can maintain their positions indefinitely while the short sellers bleed.
This situation could have been prevented if the short sellers acquired enough calls to cover their position in the event of a price spike. One would think that a rich-ass hedge fund manager would do something basic like that.
I have a guitar that I could sell on the open market for ~$300.
But I don't want to sell it.
If someone offered me $300 for it, I'd say no. If they offered $400, I'd still say no. I'd say no at $900.
Why? Because I don't want to sell it and I don't have to.
There is some price that will change my mind, of course, but it has nothing to do with the actual value of the guitar.
Most of the time the future is years down the road, because you made a good bet on what business would be profitable. Sometimes the future is the following Tuesday because someone got out over their skis and _needs_ your stock now.
But there is no one "bleeding" as they won't realize the losses until they sell the contract or it expires.
Someone correct me if I'm wrong, I only learned about it yesterday.
Normally you set a limit when you short. You don’t agree to pay an unlimited amount of money.
https://en.wikipedia.org/wiki/Short_(finance)#Risks
Otherwise you'd make yourself liable for a literally unlimited sum of money. Any short could completely bankrupt your entire personal finances or your entire institution in that case.
The investment bank has some type of collateral, usually the rest of your portfolio. When your net worth hits a certain threshold, perhaps $0 net worth of your portfolio, the bet is over. You lost all your money, and you don't end up in debt. In practice, the investment bank will cut you off before you reach this point.
But if you are an investment bank, there is no one controlling you on a daily basis, so you can dip into the negative in theory.
The problems with doing this are:
- Regulators. Once the regulator finds out you're negative, they will shut down your investment bank. Hopefully, they do this before you hit 0, but they may not get it exactly right.
- Counterparties. Other investment banks will refuse to do business with you when they know you are negative, or close to it. Once this happens, it's game over.
So in both cases, individual or investment bank, there is a practical limit on how much you can lose from one short bet. That limit is equal to your net worth.
You could lose any amount of money up to that on one short. It's risky.
There are also ways to limit your losses. You can purchase other contracts to limit your losses. This is kind of like insurance. In general, you are not required to buy this. Some people and institutions do not do this because of the expense. Most institutions structure each deal so there is no way one deal will risk the entire business. Smart people also take steps to make sure one trade does not wipe them out.
But sometimes mistakes happen.
The same hoard trading phenomenon seems to be happening with Blackberry. A number of insiders have already dumped shares, meaning anyone buying those shares isn't buying shares from a short seller, they're buying from people who recognize the price is outrageous compared to business fundamentals.
Bottom line, short sellers are definitely going to suffer, but so are a lot of robbinhood kiddies.
I happen to be cautiously optimistic about the company, but that is over a longer time-frame. The stock has more than doubled in a couple of weeks and seems to open consistently higher over the past few days. I don't think that is related to any real immediate business prospects. The Facebook settlement, Amazon deal and Huawei patent sales are all good news but hardly warranting the current frenzy.
Will Robinhood's systems and procedures work flawlessly on Friday? My guess is no. We'll find out.
I wouldn't call people who short 140% of available shares good at anything
I guess that only applies when the 'right' people are involved?
Parent is so quick to try to score a point arguing definitions that they entirely missed the point.
The situation is pretty bonkers but I hope in the end that the hedge funds have learned a lesson.
In fact, it's tautological to state that if they got burned, then they are not that good. Or perhaps the entire thing is pareidolic nonsense.
They just forgot that efficient market hypothesis is just that, a hypothesis. Real world markets behave differently thanks to finite resources and secondary markets (essentially leveraged derivatives caused 2008 crash and I believe they'll cause another before regulators wake up from their sleep).
It's similar to blaming the roulette wheel when the gambler fails and praising the gambler when they succeed.